Federal Banking Regulators Issue Community Bank Leverage Guidance in Accordance with CARES Act

The recent passage of the CARES Act included language encouraging increased lending from community banks by relaxing leverage requirements on most community banks across the country. Section 4012 of the CARES Act mandated the appropriate Federal bank regulatory agencies to issue a statutory interim final rule reducing the required leverage ratio, a measure of Tier 1 & 2 Capital to risk adjusted assets, for qualifying community banks. Pub. L. 116-136 (Mar. 27, 2020). On Monday, April 6^th, a joint interim final rule was issued by the Office of Comptroller of Currency (OCC), the Federal Reserve (Fed), and the Federal Deposit Insurance Corporation (FDIC) issued a joint rule reducing the required leverage ratio for qualifying community banks from 9% as required by rule in 2019 to 8% for the remainder of 2020. See 84 FR 61776 (November 13, 2019); Modifications to the Community Bank Leverage Ratio Framework, FDIC Financial Institution Letter 35-2020 (April 6, 2020).

In order to be considered a “qualifying community bank” a depository institution or depository institution holding company must have total consolidated assets of less than ten billion dollars ($10,000,000,000). Pub. L. 115-174 (May 24, 2018). The statutory interim final rule does not make any changes to the other qualifying criteria in the community bank leverage ratio framework. In accordance with the CARES Act the newly lowered leverage ratio will be effective either until the earlier of December 31, 2020 or sixty (60) days following the end of the COVID-19 national emergency declaration. Pub. L. 116-136 §4012 (Mar. 27, 2020). The statutory interim final rule also provides a grace period of two (2) quarters for any qualifying community bank that falls below the 8% leverage ratio but not below a 7% leverage ratio. FIL 35-2020.

In addition to the statutory interim rule Federal regulators also issued guidance for the transition back to the originally required 9% leverage ratio. The transitional interim rule gives community banks sufficient time to build capital reserves following the COVID-19 crisis. Under the transitional rule the required leverage ratio for qualifying community banks for the entire year of 2021 will be 8.5% and will return to the original 9% in the first quarter of 2022. FIL 35-2020. Based on end of year data from 2019 Federal regulators stated that 5,258 institutions had less than $10 billion in assets and 95% of those institutions will qualify to use the community bank leverage ratio framework under calculations of 8% leverage ratios and other qualifying criteria. Id.

The rules are immediately effective, however Federal agencies continue to seek comment on any suggested changes needed for either the statutory or transitional interim final rules. Comments on the statutory interim final rule can be submitted at regulations.gov under OCC Docket ID OCC-2020-0017 or Federal Reserve Docket No. R-1710. Comments on the transitional interim final rule can be submitted under OCC Docket ID Docket ID OCC-2020-0017 or Federal Reserve Docket No. R-1711.